Download or read book Essays in Over the counter Markets written by Yu An and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis consists of three essays, which examine several issues in over-the-counter financial markets. The first essay shows that dealers build socially excessive inventories in order to compete for market share. The distortion in pricing is empirically identified using transaction level data in the U.S. corporate bond market. The second essay shows that the two roles of a dealer, immediacy provision and matchmaking, create a conflict of interest. A direct implication is that bid-ask spread is a misleading measure of immediacy provision. The third essay introduces reducible intermediation chains in order to quantitatively measure search frictions in over-the-counter markets. This allows us to categorize intermediation chains by their primary intermediation incentives. Specifically, the first essay shows that dealers in over-the-counter markets build socially excessive inventories in order to compete for market share and get the associated intermediation rents. Using the TRACE dataset for the U.S. corporate bond market, I find that, excluding the crisis, the incentive to build inventory raises dealers' bid prices for corporate bonds by an average of 5 basis points. During the crisis, this effect was reversed by 23 basis points of implied additional dealer balance-sheet costs. The second essay, co-authored with Zeyu Zheng, shows that the two roles of a dealer, immediacy provision and matchmaking, create a conflict of interest that leads dealers to hold inefficiently high levels of inventory in order to extract additional rents from customers. Because of this, bid-ask spread is a misleading measure of immediacy provision. Our model suggests the use of execution delays as an additional measure of immediacy provision. The third essay, co-authored with Yang Song and Xingtan Zhang, introduces reducible intermediation chains in order to quantitatively measure search frictions in over-the-counter markets. This allows us to categorize intermediation chains by their primary intermediation incentives. Using interdealer trades in the U.S. corporate bond market, we discover new types of intermediation chains that are not formed to mitigate search frictions or to facilitate liquidity provision. Instead, these chains arise when dealers intermediate trades for other dealers in order to unwind positions at a profit.

Download or read book Essays on Over the Counter Financial Markets written by Shuo Liu and published by . This book was released on 2020 with total page 215 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three chapters that study dealer's endogenous search effort in over-the-counter (OTC) financial markets and its effect on asset's liquidity risk in U.S. corporate bond markets. In Chapter 1, I study dealer's search intensity using a transaction-level data set on U.S. corporate bonds. The main target of this chapter is to test whether dealer's search intensity is endogenously determined by their idiosyncratic states and how search intensity affects market efficiency. Existing literatures commonly do not consider dealer's continuous adjustment of search intensity in search-and-match models and there is no paper using transaction-level data to estimate the dealer-level state-dependent search intensity. In this paper, I propose a search-and-match model with dealers' endogeneous and state-dependent search intensity and estimate it using the TRACE data for the U.S. corporate bond market. I find that: [1] if we rank all dealers by their private valuations for holding the bond, the dealer of the middle-level private valuation will choose the highest level of search intensity, and she works as the "dealer of dealers" to reallocate bond positions from the low-type dealers to the high-type dealers; [2] the estimated model gives us a quantitative evaluation of the inefficiency due to the decentralized market structure. At the average level across all sub-markets in our sample, the model estimates that dealers' search cost is 0.75% of bond's face value, and there is on average 8.64% of bond positions being misallocated, comparing with a counterfactual frictionless market. In conclusion, the decentralized market structure generates 8.96% welfare loss relative to the frictionless one. In Chapter 2, I study the correlation between corporate bond's misallocation among dealers and liquidity risk. This chapter bridges the literature on search-and-match models and the literature on explaining the non-default component of corporate bond's credit spread variations. In this paper, I propose a measure of bond's misallocation among dealers. This measure is based on a structural search-and-match model, and is defined as the cross-sectional covariance of dealers' idiosyncratic private valuations for holding the bond and their actual inventory positions in the bond. Using the TRACE data for the U.S. corporate bond market, I construct a panel data which contains yearly series of empirical estimates of bond's misallocation and liquidity risk, and verify that: at the bond level, a higher magnitude of misallocation among the dealers is associated with a higher magnitude of liquidity risk. This finding gives a preliminary market microstructural evidence supporting that: the distribution of market maker's states correlates with the magnitude of asset's liquidity risk. In Chapter 3, I theoretically study the social optimal policy function of dealer's meeting technology in over-the-counter markets. This chapter contributes to the existing literature by considering the dealer-level state-dependent meeting technology in a random search model and obtaining explicit-form solutions of the social optimal policy functions. In the model, I allow the agents (dealers) to freely adjust their meeting technologies based on two types of idiosyncratic states: asset position and liquidity need. I find that in the social optimal policy functions, there is no intermediation in the sense that no dealer will choose to search simultaneously on both the buy side and sell side of the market. This result applies for a general form of search-cost function.

Download or read book Essays on Over the counter Markets written by Zhuo Zhong and published by . This book was released on 2014 with total page 181 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays studying on over-the-counter trading (OTC henceforth). In Chapter 1, I model the formation of the inter-dealer network in an OTC market, and study how the network affects prices and volumes in the market. The model explains the empirically observed core-periphery network with dealers' capacity of providing liquidity. Specifically, dealers with large capacity comprise the core of the network, connecting them to all other dealers, while dealers who have small capacity operate at the periphery. In addition, my model matches the empirical finding on the negative relation between markups and order sizes. Furthermore, I show that there may be structural breaks in this negative relationship as variations in order sizes may alter the inter-dealer network. These results suggest that empirical studies on OTC markets should control for the stability of an inter-dealer network to avoid model misspecification. Chapter 2 evaluates how a centralized market could provide an incentive for OTC dealers to reduce opacity in trading. In this chapter, opacity is modeled as Knightian uncertainty faced by investors. I find that while a competitive centralized market provides an incentive for dealers to reduce opacity in an OTC market, a noncompetitive centralized market does the opposite. Competition between the competitive centralized market and the OTC market forces dealers in the latter to reduce opacity. With the noncompetitive centralized market, opportunities for collusion provide an incentive for dealers to increase opacity. Dealers do not have the incentive to reduce opacity in this case. In Chapter 3, we test the model implications in Chapter 2 with an empirical study on the corporate bond markets, and find consistent results. We find that transaction costs of bonds traded only in OTC markets are significantly different from (10 basis points larger than) bonds traded both in OTC markets and the NYSE market. Since the latter contains pre-trade information from the NYSE market, this finding suggests that pre-trade transparency reduces bonds' trading costs. This result implies that pre-trade transparency benefits investors but hurts dealers, as the major part of dealers' profits comes from investors' trading costs. We also find that pre-trade transparency increases bonds' values. Bonds with the NYSE pre-trade transparency have significantly lower bond yields than bonds without the pre-trade transparency. Our findings are robust to endogeneity of firms' bond listing decisions on the NYSE.

Download or read book Essays on frictions in financial over the counter markets written by Shengxing Zhang and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Financial Market Structure and Design written by Mr. Haoxiang Zhu and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this doctoral dissertation, I study financial market structure and design, namely how institutional features of financial markets affect price discovery, liquidity, search behavior, efficiency, and welfare. This dissertation consists of three chapters. The first chapter studies dark pools and price discovery. Dark pools are equity trading systems that do not publicly display orders. Orders in dark pools are matched within the exchange bid-ask spread without a guarantee of execution. Because informed traders tend to have common information regarding the asset value, they are more likely to cluster on the heavy side of the market and therefore face a lower execution probability in the dark pool, relative to uninformed traders. Consequently, exchanges are more attractive to informed traders, whereas dark pools are more attractive to uninformed traders. Under natural conditions, adding a dark pool alongside an exchange concentrates price-relevant information into the exchange and improves price discovery. The second chapter offers a dynamic model of opaque over-the-counter markets. I build a theoretical model of OTC markets, in which a seller searches for an attractive price by visiting multiple buyers, one at a time. The buyers do not observe contacts, quotes, or trades elsewhere in the market. A repeat contact with a buyer reveals the seller's reduced outside options and worsens the price offered by the revisited buyer. When the asset value is uncertain and common to all buyers, a visit by the seller suggests that other buyers could have quoted unattractive prices and thus worsens the visited buyer's inference regarding the asset value. This chapter is now published at the Review of Financial Studies, Volume 25, Issue 4, April 2012. The third chapter studies settlement auctions for credit default swaps (CDS). This chapter is the joint work with Songzi Du, a fellow Doctoral Candidate at the Graduate School of Business, Stanford University. We find that the one-sided design of CDS auctions used in practice gives CDS buyers and sellers strong incentives to distort the final auction price, in order to maximize payoffs from existing CDS positions. Consequently, these auctions tend to overprice defaulted bonds conditional on an excess supply and underprice defaulted bonds conditional on an excess demand. We propose a double auction to mitigate this price bias. We find the predictions of our model on bidding behavior to be consistent with data on CDS auctions.

Download or read book Essays on Frictional Financial Markets written by Fabricius Somogyi and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays that uncover the origins of market frictions and their implications for the functioning of the global foreign exchange (FX) market. The first research paper speaks to the hegemony of the US dollar in FX trading. Over 85% of all FX transactions involve the US dollar, despite the United States accounting for less than one quarter of global economic activity. I show both theoretically and empirically that the US dollar dominates FX volumes because FX market participants are strategic about their trading costs. Hence, they avoid directly transacting in non-dollar currency pairs if the expected trading cost is too large. Instead, market participants exchange non-dollar pairs indirectly by using the US dollar as a vehicle currency. That is, market participants first exchange a non-dollar currency into US dollars, and then trade those US dollars for their target currency. I derive a set of theoretical conditions for currency dominance in FX trading volume. To validate these conditions empirically, I use a granular and globally representative FX trade data set. My empirical findings are consistent with the predictions of my theoretical framework and corroborate the importance of strategic behaviour as a novel determinant of currency dominance. Using a novel identification strategy, I show that up to 36-40% of the daily volume in the most liquid dollar currency pairs are due to vehicle currency trading. The second paper studies the information content of trades in the FX market. Specifically, we analyse a novel, comprehensive order flow data set, distinguishing among different groups of market participants and covering a large cross-section of currency pairs. We find compelling evidence that global FX order flows convey superior information heterogeneously across agents, time, and currency pairs. These findings are consistent with theories of asymmetric information and over-the-counter market fragmentation. A trading strategy based on exposure to asymmetric information risk generates high returns even after accounting for risk, transaction cost, and other common risk factors shown in the FX literature. Finally, the third paper analyses the cross-sectional asset pricing implications of liquidity risk in the FX market. Precisely because of its sheer size and despite its decentralised nature, the FX market is commonly known as one of the most liquid and resilient trading venues. However, a clear understanding of whether FX liquidity matters for asset prices is still missing. This paper aims to fill this gap by providing the first systematic study of the pricing implications of FX liquidity risk. We show that, even in this market, exposure to liquidity risk commands a non-trivial risk premium of up to 4% percent per annum. In particular, systematic (marketwide) and idiosyncratic liquidity risk are not subsumed by existing FX risk factors and successfully price the cross-section of currency returns. However, we also find that liquidity and carry trade premia are significantly correlated. The carry trade is a simple trading strategy that aims to profit from the interest rate differential between high- and low-yielding currencies. The correlation between liquidity and carry trade premia lends support to a liquidity-based explanation of the infamous carry trade risk premium. To illustrate this point, we decompose carry trade returns and show that the commonality with liquidity risk stems from periods of high market stress and is confined to the static but not the dynamic carry trade.

Download or read book Essays on Financial Markets and Trading Behavior written by Sahn-Wook Huh and published by . This book was released on 2004 with total page 436 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Financial Markets written by Jullavut Kittiakarasakun and published by . This book was released on 2011 with total page 170 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Financial Markets written by Pawan Jain and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation is composed of three essays. The first essay investigates the information content of the limit order book (LOB) on the Shanghai Stock Exchange (SHSE), a purely order-driven market, for predicting future stock price volatility. We find that the LOB supply schedule consistently and significantly predicts the future price volatility. But this predictive power of LOB declines during the extreme market wide movements. We also find that buy orders are more informative over future price volatility than sell orders but sell (buy) orders becomes more informative during the extreme market wide down (up) movement days. Finally, we document that predictive power of LOB is short lived and markets are efficient over the longer time horizon. The second essay examines the effect of high frequency trading on market quality, systemic risk and trading strategies. In 2010 the Tokyo Stock Exchange, the largest exchange headquartered outside the US, introduced a new trading platform, Arrowhead, which reduced latency by 99.97% and increased co-located high-frequency trading from zero to 36% of volume. Arrowhead improved market liquidity and reduced volatility, but it also amplified systematic risks factors like quotes to trade ratio, order-flow autocorrelation and cross correlation, and tail risks. Arrowhead also affected trading strategies by increasing trade price predictability and the use of fleeting orders. Cost of immediacy serves as a channel through which reduced latency affects market quality, systematic risks, and trading outcome. The third essay analyzes the links between corporate finance policies and investment clienteles by comparing the cross-sectional variation in the dividend payout policies of companies across 32 countries. Beyond the impact of firm-specific accounting and financial variables, this study investigates how the country level variations: shareholder demand due to demographic variations and consumption needs, agency problems manifested in the extent of minority shareholder protection and business disclosures, and market quality in terms of transparency and liquidity; affect dividend payout policies. We find that firms have generous dividend payout policies when diverse shareholder demands are strong, extents of business disclosures and legal protections are weak, and the market qualities are poor. The empirical evidence supports the presence of strong dividend clienteles in a global setting. .

Download or read book Essays on Trading in Financial Markets written by Alessia Testa and published by . This book was released on 2012 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Three Essays on Fairness Liquidity and Efficiency in Modern Financial Markets written by Jiang Zhang and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation research comprises three essays. In the first essay, we study the impact of high-frequency trading on market fairness and efficiency. The implementation of the Arrowhead Renewal on the Tokyo Stock Exchange (TSE) in 2015 reduced latency from 1 millisecond to less than 0.5 milliseconds and led to an increase in high-frequency tradingas proxied by the cancel-to-trade ratioof 34%, We find that the number of incidents of marking-the-close declined by 17%, indicating that market fairness improves. We find that for high-tick-size and high-market-capitalization stocks market efficiency improves, but for low-tick-size and low-market-capitalization stocks, it does not. In the second essay, we test the implications of competing theories on liquidity dynamics during extreme price movements (EPMs). Our findings indicate that market makers strategically allow for price pressures and earn compensation from pricing errors. As a result, liquidity provision intensifies towards the end of an average EPM. This goes counter to a widespread concern that market-making constraints cause the deterioration of liquidity as EPMs develop. Finally, we demonstrate that limit order book dynamics during EPMs are in line with a socially beneficial equilibrium. In the third essay, we revisit the tax-loss selling hypothesis as a potential explanation of the well-known January effect in securities markets. We expand the empirical evidence from municipal bond closed-end funds by extending the sample period by almost 20 years and adding exchange-traded funds to the sample. Our updated sample covers the recent growth of municipal bond ETFs and a significant increase in municipal bond trading volume and liquidity. Both developments reduce arbitrage costs and thus are expected to increase tax-loss selling in the funds and increase the transmission of price effects to the underlying bonds. We find that the January effect of municipal bond closed-end funds becomes stronger in more recent years, and show evidence that largely supports the tax-loss hypothesis. We also find some evidence indicating a smaller discrepancy between the abnormal returns of the funds and underlying bonds..

Download or read book Essays in Financial Economics written by Adem Dugalic and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation explores effects of trading frictions due to the over-the-counter nature of some financial markets on asset prices, trading activity, market structure and efficiency. The first chapter analyses how the introduction of post-trade transparency affected dealers' trading and market liquidity in the secondary U.S. corporate bond market. Using the TRACE dataset with a novel variable identifying different dealers in the market, I quantify dealers' centrality in the context of the trading network and estimate a differential response to the reform across dealers of different centrality. I show that the introduction of transparency reduced the estimated bid-ask spreads of peripheral dealers by about 24 basis points, while spreads of core dealers remained unaffected. The trading volume of high-yield bonds fell by 6.7% for core dealers and by an insignificant amount for peripheral dealers. There was no effect on dealers' capital commitment and inventory behavior. To rationalize these findings, I propose a dynamic model of trade with asymmetric information and search frictions that gives rise to endogenous heterogeneity in dealers' trading activity and explains the empirical evidence. Three mechanisms through which transparency may affect the market are outlined: marketwise reduction in adverse selection, higher demand for immediacy by informed traders, and interaction between liquidity and informed traders. Further effects of transparency and welfare implications in the context of the model are discussed. The second chapter is co-authored with Diego Torres Patino. We study how short sale constraints on the lending side of the market affect asset prices in an equilibrium model with multiple assets. We endow investors with heterogeneous beliefs in order to generate short selling demand. We obtain a CAPM-like equation that links asset-specific excess returns with the market equity premium. In the presence of short sale constraints in the market, the model gives rise to asset-specific alphas that are explained by both asset-specific and market-wide short sale constraints; unconstrained stocks have higher risk-adjusted expected returns relative to the market portfolio, whereas the opposite holds for constrained stocks. In the absence of short sale constraints, the model reduces to the standard CAPM. We test the model using extensive data on short interest and borrow fees. The model is able to empirically explain asset prices for 10 portfolios sorted by the degree to which they are short sale constrained, as opposed to the CAPM and factor models which produce unexplained alphas that are significantly different from zero for the portfolios consisting of highly constrained stocks. In the final chapter, I study financial intermediation in a model of entry and competition between an over-the-counter market and exchange. The over-the-counter market is characterized by search, bargaining and capacity to intermediate trade of securities customized to individual investors. The exchange can support trading of a subset of standardized securities at prices quoted to all investors. I compute explicitly asset prices and volume at each trading venue and analyze efficiency of the resulting market structure. Bargaining power of investors in the OTC market and cost associated with trading non-customized securities at the exchange have ambiguous effects on the relative volume across the trading venues. The market outcome is inefficient due to bargaining in the OTC market and imperfect competition of specialist at the exchange. The model is well suited for quantitative analysis provided sufficiently detailed trading data from both types of trading venues.

Download or read book Essays on Volatility and Risk in Financial Markets written by Kwanho Kim and published by . This book was released on 1993 with total page 312 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Financial Markets written by Gregory Robert Duffee and published by . This book was released on 1989 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Financial Markets written by Dawid Brychcy and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Information and Market Design written by Ji Hee Yoon and published by . This book was released on 2018 with total page 202 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study the design of markets and the performance of various trading mechanisms with respect to efficiency and information aggregation. Endogenous Market Structure: Over-the-Counter versus Exchange Trading For many assets, traders favor either over-the-counter (OTC) or centralized markets. This paper examines how traders' choices between these trading venues depend on asset and trader characteristics. A trader's incentive to choose an OTC market depends on the benefit of learning his asset value and the cost due to price impacts. Traders choose OTC markets over centralized exchanges when the asset values are heterogeneously interdependent and traders' private information is sufficiently inaccurate. Market structures are endogenously determined by traders' individual market choices. This paper provides comparative statics of equilibrium market structures. The OTC and centralized market coexist only when traders are asymmetric. Furthermore, the OTC market decreases information efficiency by being conducive to trade only between informed traders. Uncontingent Trading and Exchange Design (with M. Rostek) In many markets, a trader's demand for each asset is contingent on the price of that asset alone rather than on the price of all assets he trades. This paper examines a uniform-price double auction with arbitrary restrictions on cross-asset conditioning, including contingent demand schedules (demands for each asset condition on the price vector) and uncontingent schedules (demand of each asset conditions on the price of that asset). In contrast to markets with contingent schedules, a trader optimizes with respect to a directional derivative rather than asset-by-asset. A trader's best response itself is determined by a fixed point between his first-order condition and the directional derivative. We characterize equilibrium in markets with limited cross-asset conditioning and examine the welfare effects of conditioning restrictions. If suitably designed, markets with limited demand conditioning are always at least as efficient as markets with contingent demands. Creating multiple exchanges for the same assets is generally not redundant for welfare even if all traders participate in all exchanges. Inference Design (with M. Rostek) This paper examines how market design can be used to induce the desired informational properties of prices and accomplish revenue or efficiency objectives. A model of double auction with quasilinear-quadratic utilities is introduced that allows for arbitrary Gaussian information structures, and in particular allows for heterogeneity in interdependence of trader values. With heterogeneous interdependence, some traders learn more from prices whereas others from private signals; thus, centralized market clearing can isolate informed trading from uninformed trading (learning from signals versus learning from prices). Changes in the information structure can enhance both learning from prices and private signals for all traders; changes that lower price informativeness for some market participants may improve the price informativeness of other agents. We characterize conditions on the information structure for price and signal inference to involve no tradeoff.

Download or read book Essays on Incomplete Financial Markets written by Dirk Ebmeyer and published by . This book was released on 2001 with total page 350 pages. Available in PDF, EPUB and Kindle. Book excerpt: